US Federal Reserve policymakers were concerned at a meeting in September that falling prices would limit their ammunition to boost the US economy.

This insight into the Fed's monetary policy was revealed in the minutes of meeting held on 24 September to decide on US interest rates.

Some observed that a significant decline in inflation... could imply an unwelcome tightening of monetary policy

Fed minutes

As a result of that meeting, interest rates were left on hold at 1.75% - although the Fed has since cut rates at its most recent meeting by half a percentage point to 1.25%.

The minutes, which were released on Thursday, provide vital clues as to why the Fed left interest rates unchanged at the September meeting, following a 10-2 vote.

Inflation concerns

The minutes showed that Fed policymakers were conscious of a slow labour market and various forecasts pointing to a further decline in prices.

"Some observed that a significant decline in inflation... could imply an unwelcome tightening of monetary policy in real terms," added the minutes of the Federal Open Market Committee (FOMC) meeting.

In other words, the Fed was concerned that a decline in the price of goods would counteract the benefits of any further cuts in interest rates.

Falling inflation - or deflation - was one ingredient in Japan's decade of stagnation, as it was in the Great Depression of the 1930s.

Businesses that are forced to lower prices to remain competitive generally, as a result, have less money to repay debts.

In turn, this means they are less inclined to borrow money to invest in expanding, which has a knock-on effect on the economy.

Two doves

The only two members of the FOMC who voted for a cut in September were Fed Board Governor Edward Gramlich and Dallas Fed Bank President Robert McTeer.

"They were persuaded by what they viewed as already strong evidence of a persisting unsatisfactory, and perhaps weakening, economic performance," the FOMC minutes said.

But most of the other members were comforted by stronger than expected data on household and business spending - and decided not to cut rates.

While household spending continued to be fairly robust, FOMC members said consumption "was seen as likely to remain a positive but possibly a more limited source of support for the expansion over the next several quarters".